Market conditions are ever changing. Oftentimes, the best time to sell is when the market looks the strongest. Similarly, the best time to buy is when the market looks most weak. In the spirit of Contrary Opinion and the Fear Factor, the following is my best sense of how the balance of 2011 might unfold.
Between Now and July 1, 2010.
The market appears to be putting in a short-term bottom. Several factors point to this conclusion. First, the daily Trin reading is quite high today. As I type, the trin reading is at 1.93. That is on the high side. A high trin indicates more money is leaving stocks than entering stocks. It is a rough gauge of cash flow into and out of the market. Ironically, high trin readings are bullish. They create buy opportunities. Second, the low today was 1268. I wrote down 1268 this morning as an anticipated low consistent with a short-term up trend. Thus far, 1268 has held. The longer 1268 holds as support, the more bullish I am. Third, the 200-day moving average has provided strong support thus far since June 16. Fourth, yesterday's price action showed strong buying pressure up from the 1262 level. We now appear to be retesting that level. Finally, it is normal for the market to hit the 50-day moving average before declining further. The 50-day moving average is now at 1318 on a daily chart. That level would seem to be a target for the market.
Between July 1, 2011 and October/November 2011
The outlook is bearish. The dominant down trend remains intact. Alot of damage was done to investor psychology during the month of May. Consider these factors:
First, the Elliott Wave theory suggests that we have a final fifth wave down to witness. Thus far, the market has only gone down in two waves (May 1 to May 23, June 1 to June 16). There is a final decline ahead of us.
Second, the Stock Trader's Almanac on page 104 refers to an idealized chart of price action on the Russell 2000/Russell 1000 One-Year Seasonal Pattern. The chart is interesting in that depicts a sharp drop between July 1 and the end of August based on daily data from July 1, 1979 to April 30, 2010. The chart is not a guarantee that the future will unfold the same way but it is a factor to take into consideration.
Third, the absence of $600 billion in buying pressure from the Federal Reserve as of June 30 would seem bearish for the market. Remember how the Federal Reserve ended QE1 last year? The termination of QE1 resulted in the Flash Crash in May 2010. History doesn't always repeat itself but one has to wonder where will the money come from to replicate $600 billion in buying pressure?
Fourth, the weekly chart of the S&P 500 Index shows a down trend based on the MACD lines and the stochastics. The momentum is down for now.
Finally, notice how news about Greece seems to matter more now. Bad news is not ignored in a Bear Market. Bad news is sold.
In conclusion, the coming four months should be bearish. Price should drift lower, although it is not clear they will stair case lower or plunge lower.
November - December 2011 End of the Year Rally
It is likely that the market will rally into the end of the year. Thus, be prepared to
move back into the C Fund around October/November. This is a good time to also select individual small-cap stocks for rallies.
Your market strategist,
Wink
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